Herd mentality

Herd mentality is the tendency for investors to follow what a large group of other investors is doing, buying what is rising because everyone else is buying it and selling what is falling because everyone else is selling, rather than reaching an independent conclusion based on their own analysis. It is a natural human instinct, following the crowd usually feels safer than standing apart from it, but it can work against sound investing.

Herding tends to intensify both bubbles and crashes. As more investors pile into a rising trade simply because it is rising, prices can move further from what the underlying fundamentals support, and the same dynamic in reverse can drive a sell-off well past what the actual news justifies, as one round of selling triggers the next.

Herd behavior is difficult to resist precisely because it does not feel irrational from the inside, being part of a large group moving in the same direction provides a kind of social confirmation that feels like evidence on its own. Independent investors try to counter it by anchoring decisions to their own research and valuation work rather than to what a stock's recent price action or a wave of headlines suggests everyone else believes.